ROANOKE TIMES
Copyright (c) 1995, Roanoke Times
DATE: Wednesday, December 20, 1995 TAG: 9512200083
SECTION: BUSINESS PAGE: C-8 EDITION: METRO
DATELINE: WASHINGTON
SOURCE: Associated Press
The Federal Reserve cut a key interest rate on Tuesday, turning fears to cheers on Wall Street.
As stock prices rebounded, one private bank quickly cut its prime lending rate, and others were expected to follow - heralding lower consumer rates for millions of Americans. No Virginia-based banks changed their prime rate on Tuesday, but they can be expected to follow any national trend among major U.S. banks.
The Fed announced it was reducing its target for the federal funds rate from 5.75 percent to 5.50 percent.
That cut, affecting loans among banks, was read by financial markets as a sign the central bank was ready to fight a weakening economy with easier credit. Stocks had plummeted on Monday as investors showed their concern that the Fed would be scared off by the federal budget stalemate.
The Dow Jones industrial average, which had lost 101.52 points on Monday, recouped one-third of that decline in the final two hours of trading after the Fed announcement.
The Dow closed at 5,109.54, a gain of 34.33, as stocks took their cue from a big rally in the bond market.
``The Federal Reserve has given the nation a badly needed Christmas present,'' said Jerry Jasinowski, president of the National Association of Manufacturers. ``We can well afford to cut interest rates, because inflation remains nearly nonexistent and growth has slowed precipitously.''
Banc One, the nation's eighth largest bank, announced it was cutting its prime lending rate based on the Fed action.
The prime rate is the interest banks charge for loans to their most creditworthy commercial customers. Some consumer loan rates are connected to the prime.
Economists predicted that other major banks would quickly follow, sending the benchmark rate for millions of consumer and business loans down to 8.5 percent. It has been at 8.75 percent since the Fed's last rate cut July 6.
``The Fed was clearly going to loosen. The only question was the timing,'' said David Wyss, chief financial economist at DRI-McGraw Hill Inc. ``They may have become worried that the financial markets were becoming too nervous.''
``The economy has clearly slowed, and the Fed is recognizing that,'' said Lawrence Chimerine, chief economist at the Economic Strategy Institute in Washington. ``Auto sales are soft, housing has flattened out, and manufacturing is weak. There is very little driving the economy right now.''
In a brief statement after a four-hour meeting, Federal Reserve Chairman Alan Greenspan said lower recent inflation and the easing of inflation worries in financial markets warranted ``a modest easing.''
Many economists predicted that Tuesday's rate cut would be followed by another reduction at the Jan. 30-31 meeting and possibly more if the economy remains weak.
LENGTH: Medium: 59 linesby CNB